PETALING JAYA: South-East Asian economies and the larger Asia have a new reason to envy Malaysia.
The RM1.8 trillion domestic economy, which has become a magnet for foreign investments and whose currency is the best regional performer this year, is just points away from its bourse entering a bull market.
Since mid-2023, the FBM KLCI has rallied by nearly 17%, adding over 200 points.
It needs less than 50 points to enter the bull market, which many analysts in town think is highly possible before the year-end.
The last time Bursa Malaysia went on a bull run was in 2020, although it was largely a rebound from the crash triggered by Covid-19 economic shutdown.
Prior to that, it witnessed the world’s longest bull run that lasted for more than a decade and ended in April 2018.
Interestingly, the bull run coincided with the administration of Datuk Seri Najib Razak, despite negative developments like the 1Malaysia Development Bhd scandal and the 2014 oil price crash.
The current FBM KLCI rally took a beating on Aug 5 amid the global equity sell-off, led by the unwinding of the yen-funded carry trades as well the recessionary fears in the United States as jobless rate in July ticked up – the highest level since October 2021.
The barometer index of Bursa Malaysia fell by over 74 points or 4.6% on Aug 5.
However, in just a week, the index has recovered over 94% of the losses.
Yesterday, FBM KLCI crossed the psychological level of 1,600 points, up by 10.61 points or 0.66% to close at 1,606.66 points.
Year-to-date, FBM KLCI is the best performer in Asean and is the third best among key Asian indices, after Taiwan and India.
In May, Bursa Malaysia hit another milestone after its market capitalisation crossed RM2 trillion for the first time.
Despite the rally, the local stock market is still not expensive for investors, with FBM KLCI currently trading below its five-year mean, according to Tradeview Capital chief executive officer Ng Zhu Hann.
Ng also told StarBiz that FBM KLCI would stay above the 1,600-point level if the unwinding of the remaining yen-funded carry trade happens more gradually.
Of the US$500bil yen-funded carry trades, only 50% had been unwind, a UBS note estimated last week.
Commenting on Bursa’s upside potential, Ng said it offers “laggard play”, supported by the good policies under the leadership of Datuk Seri Anwar Ibrahim.
The improved ratings by investment banks such as JP Morgan have made the local stock market attracted the attention of global investors, he said.
“Apart from being a low-beta and defensive market, the Malaysian bourse is more attractive compared with regional stock exchanges. For example, Thailand is affected by its political volatility, while Indonesia is affected by foreign exchange risk that makes rupiah-based investments volatile,” he added.
Tradeview’s in-house expectation is for the FBM KLCI to end the year at 1,650 points.
“Had it not been for the political risks from the US presidential polls, the target would have been 1,700 points.
After rising by more than 200 points over the past year, Ng said FBM KLCI would need “some time to stabilise” before staging the next surge.
“For that to happen, we need greater involvement of foreign funds in the local market. And it has to be sustained.”
For the week ended Aug 9, foreign investors net sold RM768.5mil worth of local equities, largely due to the ripple effects caused by the turbulence on Wall Street.
The week before, foreign funds net bought RM243mil in equities, following a net sale of RM424mil in the prior week ended July 26. Year-to-date till Aug 9, Bursa Malaysia recorded a net foreign fund outflow of RM165mil.
Apart from foreign funds, corporate earnings growth delivery would be key in taking the FBM KLCI higher, said Maybank Investment Bank head of Malaysia equity research Wong Chew Hann.
“Other catalysts include US interest rate cuts, further foreign direct investments (including details of the Johor-Singapore Special Economic Zone) to strengthen economic growth; and the outlook of a firmer ringgit.”
The ringgit appreciated by 3.1% against the US dollar year-to-date, reaching 4.45 per US dollar as at press time yesterday.
The Singapore dollar, Thai baht, Japanese yen, South Korean won and Indonesian rupiah had weakened against the greenback in the same period.
“We maintain our end-2024 FBM KLCI target of 1,680 points, which implies a forward price-to-earnings multiple of 15 times,” said Wong.
A more optimistic UOB Kay Hian Wealth Advisors head of investment research Mohd Sedek Jantan expects the FBM KLCI to hit 1,735 points by the end of the year.
The target has been revised upward from 1,650 points earlier.
“The domestic catalysts for FBM KLCI are the strengthening of the ringgit, political stability and pro-business policies.
“As for external catalysts, they include changes in central bank tone, economic recovery in China, and the US semiconductor cycle,” he added.
The optimism on Bursa extended beyond blue chips as reflected in FBM Small Cap Index. It had outperformed FBM KLCI year-to-date, rising by 13.19% as compared with FBM KLCI’s 10.45%.
The market is buoyed by positive news flow driven by investments into artificial intelligence (AI) and data centres.
Google and Microsoft, as well as Nvidia (via a partnership with YTL Group) had pledged billions of dollars into Malaysia’s AI-data centre space.
Despite the market optimism and pundits guiding for a higher FBM KLCI level, risks continue to linger.
Maybank foreign exchange research head Saktiandi Supaat said while the global market stock rout is over, the factors which led to it would remain.
They include the risk of a sharper than expected US rate cut, US recession risk, and the monetary tightening by the Bank of Japan (BoJ) to be faster than expected.
“That said, the latter risk from the BoJ is less likely now. For the quarter, there is still likely to be volatility from the US data and markets as well as central policy risks,” said Saktiandi.
